Working capital is the capital a business uses in its day-to-day operations, calculated as current assets minus current liabilities.
Working capital measures a company's operating liquidity, meaning its ability to meet short-term obligations from short-term resources. The related working capital cycle, or cash conversion cycle, measures how long it takes to turn inventory and receivables back into cash. Businesses shorten that cycle by collecting receivables faster, turning inventory more quickly, or extending the time they take to pay suppliers, which frees cash for growth.
For an emerging consumer brand, working capital consists of:
- [Inventory + Receivables] - [Accounts Payable + Credit Cards + Other Debt]
As emerging consumer brands grow, the amount of working capital they need grows too, because they must hold more inventory, and if they sell through wholesale, their receivables grow as well. It is usually much more cost-effective to fund inventory and receivables with a working capital line of credit than to raise equity, as lenders such as 📝Assembled Brands do for consumer brands.